Here’s Marc Lichtenfeld on MarketWatch, explaining why sustainable income is more valuable than high yield:
After all, yield is important. If you’re going to achieve your financial goals by investing in dividend paying stocks, you do need a decent payout.
But even more important than the amount you’re getting paid is the likelihood that you’re going to get paid at all. To determine if the dividend is sustainable, look at the payout ratio.
The payout ratio is the percentage of earnings that is paid out in dividends. For example, if a company has $100 million in earnings and pays out $50 million in dividends, the payout ratio is 50%. It pays out 50% of its earnings in dividends. The payout ratio formula is: Dividends paid/net income.